UPDATE 2-HBOS says to provide funding to repay Grampian ABCP

(Releads, adds further detail, analyst comment)

LONDON, Aug 21 (Reuters) - British bank HBOS Plc HBOS.L said it would lend money to its Grampian Funding commercial paper programme to repay maturing asset-backed commercial paper, in a further sign of the turmoil in short-term debt markets.

HBOS said in a statement on Tuesday it had taken the action due to market conditions and would continue to provide facilities “until such time as market pricing improves to a level acceptable to HBOS”.

Short-term funding has been disrupted and borrowing costs have risen in recent weeks as concerns about the U.S. subprime mortgage crisis have spilled over into other markets. On Monday, yields on three-month U.S. Treasury bills posted their biggest one-day drop since the stock market crash of 1987 as investors in short-term debt sought shelter in the safest government securities.

According to data from credit ratings agency Standard & Poor’s the Grampian programme has a $40 billion authorised amount and as of June 2007 had $36.1 billion outstanding, a figure that has remained relatively stable over the past year.

Grampian invests in triple-A rated securities, with the bulk of them being mortgage-related or collateralised debt obligations, S&P said.

HBOS said the action would have no material adverse impact on the bank and said it had sufficient liquidity lines to replace the whole of the ABCP outstanding.

Five-year credit default swaps on HBOS rose 4.5 basis points to 48.5 basis points after the news emerged, according to prices from Deutsche Bank.

The Grampian programme is rated A1+ by S&P and Prime-1 by Moody’s Investors Service, the highest short-term ratings.


The news was not a threat to HBOS, analysts said.

Instead it showed just how costly it has become to raise short-term funding, with the bank able to fund the Grampian transaction more cheaply through its own liquidity facilities rather than tapping the market.

“It shows the commercial paper market is not up and running and still not working right,” an analyst said.

Analysts at CreditSights, an independent credit research firm, said in a recent note that HBOS was among the largest European liquidity providers to CP programmes, along with ABN AMRO AAH.AS and HSBC Holdings HSBA.L.

“Most of the major European banks sponsor ABCP conduits and almost certainly provide the bulk of their liquidity lines,” they wrote. “While the commitments are significant ... we do not think this is a serious threat to the major banks in view of their size and diversification,” they said.

Alexander Plenk, a credit analyst at UniCredit HVB, however said that it was clearly a negative factor for HBOS, although not a threat.

“It’s nothing that will kill the bank but it is definitely a negative for HBOS,” he said. “Of course it is negative ... if you have to provide liquidity for something that should run independently. (Additional reporting by Natalie Harrison)